Economic History and Business History: Mutual Contributions and Future Prospects
By
Steven Toms (University of York) and John Wilson (University of Liverpool)
Correspondence:
J.S. Toms
Professor of Accounting and Finance and Head of School
The York Management School
Freboys Lane
University of York, Heslington, York, YO10 5GD, UK
Tel: (44) 1904-325019
Fax: (44) 1904-434163
Email:
Abstract
In the very first edition of Business History T.S Ashton described economic history as 'the parent study', arguing that business history's principal role was to highlight micro-economic perspectives. Much has happened in the intervening 52 years to undermine this view. Indeed, business history would now claim to be a discipline in its own right, with flourishing academic journals, several textbooks, and a plethora of literature of both a generalist and case-study form. At the same time, it is vital not to overlook the enormous complementarities that link economic and business history, specifically for example in terms of better understanding such concepts as entrepreneurship, industrial structure, industrial relations, the impact of government policies, and the roles played by financial institutions in a modern economy. Business historians now think as much about the economic, social, political and cultural environments in which business operates as they do about business operations in their micro-economic context. Meanwhile economics and social science theory more generally has evolved new conceptual frameworks and methodological tools that allow the development of new perspectives in business and economic history. One might therefore argue that the two disciplines are now bound together much more extensively than they would appear to have been in the 1950s.
This paper therefore argues that too much divergence between economic history and business history is both undesirable and unnecessary. Such an outcome might arise for example if business history were to become too strongly subsumed within the business school research agenda, embracing sociological and cultural methodologies to the exclusion of a productive relationship with economics. A further risk would be that micro-economic theory that has become useful for firm level analysis in fields such as corporate strategy is also lost to the history agenda. At its embryonic stage business history complemented economic history as a tool of further analysing the residuals in total factor productivity models. Today it offers more than that, including dynamic theories of resource creation, sustained competitive advantage and corporate control. Economic history meanwhile provides suitable methodologies for business historians to model the performance of entrepreneurs or the consequence of managerial decisions.
To exemplify the advantages of these overlapping approaches, the paper revisits a key theme in the economic history literature from a business history perspective: the loss of British competitiveness at the corporate level and consequent economic decline from the middle of the nineteenth century onwards, referred to in shorthand as the entrepreneurial failure hypothesis. An archetypal case study, Lancashire cotton textiles, is used for the purposes of reviewing this hypothesis. It is appropriate to do this, not least because business and economic historians have neglected what had been a productive research programme two decades ago. Most of the residual work has been done by economic historians, without reference to business history approaches, leaving an important gap for business historians to fill in a way which is helpful to the economic history agenda.
The paper begins by tracing the origins of business history as a branch of economic history reviewing recent developments in business history as it has developed into a discipline in its own right. It then examines aspects of management theory that have inputted into this process, differentiating between those that are helpful to achieving a coherent programme of economic/business history research and those that are inimical. The former include the resource based view of the firm, and the related notion of dynamic capabilities, which when linked to processes of governance and corporate accountability, offer the potential to link economic theory and economic history with business history by providing a micro theory of the operation of the firm. The paper then updates the entrepreneurial failure literature in economic and business history and re-examines the evidence on Lancashire cotton case study using this integrating theoretical framework. In doing so it shows that there is much to be gaining from potential complementarities in a future economic and business history research programme addressing this, and wider debates. In outlining these potential complementarities for future research the paper will also set out an agenda for how economic and business history can work together in providing better insights into the operation of economic forces.
Introduction
The paper begins by tracing the origins of business history as a branch of economic history reviewing recent developments in business history as it has developed into a discipline in its own right. It then examines theories that have developed since these original issues were investigated. The resource based view of the firm, and the related dynamic capabilities literature in particular, offer the potential to link economic theory and economic history with business history by providing a micro theory of the operation of the firm. In this perspective competitive advantage is explained as a consequence of unique resource endowments and imperfections in factor markets. It is concern with such imperfections in specific historical contexts that drove the original research programme of economic historians to investigate the firm-level causes of declining British competitiveness. The paper then updates the entrepreneurial failure literature in economic and business history and re-examines the evidence on Lancashire cotton case study using this integrating theoretical framework. In doing so it shows that there is much to be gaining from potential complementarities in a future economic and business history research programme addressing this, and wider debates.
Business history: origins and recent developments
Business History was originally regarded as a branch of economic history in the USA and in Britain.[1] It emerged in Britain emerged in the 1950s following the publication of a series of influential company histories and the establishment of the journal Business History in 1958 at the University of Liverpool. The most influential of these early company histories was Charles Wilson’s History of Unilever, the first volume of which was published in 1954. Other examples included Coleman’s work on Courtaulds and artificial fibres, Alford on Wills and the tobacco industry, Barker on Pilkington’s and glass manufacture.[2] These early studies were conducted by primarily by economic historians interested in the role of leading firms in the development of the wider industry, and therefore went beyond mere corporate histories. Although some work focused on the successful industries of the industrial revolution and the role of the key entrepreneurs, in the 1970s scholarly debate in British business history became increasingly focused on economic decline. For economic historians, the loss of British competitive advantage after 1870 could at least in part be explained by entrepreneurial failure, prompting further business history research into individual industry and corporate cases. The Lancashire cotton textile industry, which had been the leading take-off sector in the industrial revolution, but which was slow to invest in subsequent technical developments, became an important focus on of debate on this subject. Mass and Lazonick for example argued that cotton textile entrepreneurs in Britain failed to develop larger integrated plants on the American model; a conclusion similar to Chandler’s synthesis of a number of comparative case studies.[3]
British business history began to widen its scope in the 1980s, reflecting increasing involvement in the discipline by Business and Management School academics.[4] Areas of investigation have included management strategy themes such as networks, family capitalism, corporate governance, human resource management, marketing and brands, and multi-national organisations. Employing these new themes has allowed business historians to challenge and adapt the earlier conclusions of Chandler and others about the performance of the British economy.[5]
A framework for economic and business history
Divergence between the disciplines of economic and business history might arise where business historians are merely atheoretical,[6] explicitly reject the use of economic methodologies or simply ignore them, preferring instead to investigate the evolution of managerial culture.[7]For example Rowlinson and Procter suggest that reliance on economic theory, professed objectivity, and complacency towards post-modernism, act as barriers to the development of business history as a theoretically informed of discipline that can relate to the agenda of organization studies.[8] However desirable such an outcome might be for organization studies, the gains for business history are less obvious. Indeed the call for such an alliance reflects divisions with the discipline of management studies. Organization studies, as understood by Rowlinson and Procter, represents only one branch of organisation theory, which has carried on almost unnoticed by the US mainstream literature, and remains underpinned by organisational economics. In turn, this is only one branch of a management literature which also includes strategy and governance. The latter approaches rely on various forms of applied economics, such as the evolutionary and new institutional approaches.[9]
It is in these economics-based elements of management studies that the greatest potential lies for the development of a theoretically consistent approach to economic and business history. There are potential benefits for management studies as well, although these branches typically do not engage in historical analysis.[10]
From the point of view of economic history, these approaches offer some distinct advantages. For example, the resource based view has attracted significant attention in the strategic management field.[11]Business history has begun to use strategic management models that are rooted in applied economics in a framework that goes beyond Chandler, integrating the resource based view of the firm and resource dependency perspectives.[12] Some conclusions about the determinants of corporate behaviour in the UK and the US have already been drawn.[13] However, the economic history literature has made little use of the RBV approach to date although there are some recent exceptions.[14]There have also been limited examples of integration of corporate governance and in a transaction cost framework.[15]
A number of useful research questions can be addressed, using the resource based view of the firm and resource dependency perspectives, for example:
- What are the unique difficult to replicate resources possessed by individual firms that enable them to earn long run abnormal profits?
- How can such profits be distinguished from monopoly rents?
- How are unique non-replicable resources valued in relation to the abnormal profit streams generated by their employment?[16]
- Once earned, how are abnormal profits distributed, accumulated and reinvested in the firm/industry/economy?
When considering debates that are important in both the economic and business history literatures, for example the proposition that major firms have difficulties over a long period in sustaining their initial endowment of resources and capabilities.[17]
A potentially useful application of this is to revisit the hypothesis of entrepreneurial failure in late Victorian Britain. It is difficult to see how the question of entrepreneurial failure can be resolved without considering at least these questions separately, as well as assessing their collective impact. Failing entrepreneurs need to be shown not to be investing in non-replicable resources, suffering lower profits as a result and failing to invest/reinvest resources in their firms. Considering these aspects and their holistically relationship gets us closer to a theory of the firm that is best tested empirically by a combination of econometric and archival methods. Combined research methodologies also have the advantage of synergistic addition to the weight of evidence brought forward to examine any given hypothesis.
The entrepreneurial failure debate
The failure of the late Victorian entrepreneur has been justified by evidence of falling productivity growth rates for the British economy relative to overseas competition.[18] An alleged reason for loss of competitive advantage was the technological conservatism of British entrepreneurs and an associated hypothesis about the rationality of the choices made.[19] There have also been sociological arguments about their preference for wealth consumption over productive reinvestment[20] and in the case of the cotton industry in particular, problems caused by excessive vertical specialisation. At its conclusion in the early 1990s, the debate had polarised between those who believed that Lancashire entrepreneurs made rational choices and those who believed that optimisation within normal constraints was an insufficient test of entrepreneurial ability, and that entrepreneurs should have overcome constraints that otherwise prevented the restructuring of the industry.[21]
Since the 1980s the debate on entrepreneurial failure has subsided to some extent, but more importantly has developed along separate lines in the business and economic history literatures. In economic history claims of entrepreneurial failure have become more muted or nuanced and less well supported by quantitative evidence.[22]For example, using a Total Factor Productivity analysis, Crafts et al attribute declining productivity to managerial failure, for example in flawed investment decisions, but also regulatory failure.[23] Business historians have examined the entrepreneurial failure debate using industry and firm level case studies.[24] Scott, in a case study of the coal industry, argues that the diffusion of high throughput technology, hitherto used a measure of entrepreneurial performance, was limited by technological path dependencies and fragmentation of property rights. Fleming McKinstry and Wallace analyse the case of North British Locomotives showing that entrepreneurs in general made rational decisions, and were able to some constraints such as access to financial resources, but could not overcome others such as government policy driven shifts in the demand function. [25] Arnold and McCartney compare national and corporate level accounting data in the period 1855-1914 and conclude that poor entrepreneurial performance does not correspond to poor financial performance, suggesting that economic decline might be better explained by the events of the First World War and their aftermath.[26] Taken together, these studies suggest the beginnings at least of alternative hypotheses to explain the decline of the British economy, based on path dependency, financial constraints and dislocation of world markets following the First World War.
Examples from the Lancashire textile industry
Rings vs mules revisited
Since the early 1990s, economic historians have re-examined aspects of entrepreneurial failure in cotton textiles, with particular reference to the issue of technological choice and alleged conservatism of Lancashire entrepreneurs. In general recent evidence from the economic history literature has supported the rehabilitation of Lancashire entrepreneurs. For example, Leunig shows that in Lancashire mule spinning was more productive and entrepreneurs’ choices were therefore rational.[27] Saxonhouse and Wright show that decisive improvements in preparatory technology, in particular Casablanca’s high drafting method, meant the mule lost its advantage on finer counts, but only from the 1920s onwards.[28] Ciliberto has re-examined the adoption of ring spinning and automatic weaving using firm level data for the whole industry between 1884 and 1913. Industry level data shows that there was at least an association between increased adoption of ring spinning after 1902 and the establishment of the British Northrop loom company in 1904.[29]These studies confirm the view that Lancashire entrepreneurs made rational decisions in terms of their choice of technology. They also tend to relocate the search for entrepreneurial failure in the 1920s rather than in the late Victorian era.
Recent business histories have tended to confirm these conclusions. Firm specific examples of the adoption of ring spinning confirm the story of technological path dependency and superior productivity of the mule. Strong regional path dependency explained the establishment of the first ring spinning mill, New Ladyhouse Mill at Milnrow near Rochdale in 1877, and subsequent investments at the same location in the early 1880s with the establishment of Haugh and New Hey Mills.[30] In this area there had been an established tradition of using throstle spinning, which like ring spinning was a continuous method, for producing coarser warp yarns.[31]These experiments in ring spinning were described as a ‘leap in the dark, involving great risk’[32].
One reason for this was the cost structure and productivity differed considerable from mule spinning. Table 1 compares the wage cost per spindle and per hand in the new ring mills to a comparable sample of mule mills in the adjacent Oldham area, comparative percentages by cost category and spindles per hand for the Milnrow group are compared to the industry average for mule spinning. The data in table 1 provide strong evidence that labour intensity was much higher in ring spinning. Labour intensity arose from the organisation of certain process, for example doffing.[33] Doffing was an unskilled task, normally assigned to teams (four per machine) of young and inexperienced workers, and their employment no doubt added to the labour intensity of ring spinning.[34] Ring spinning also required more labour in roving and other preparation stages and in other after spinning processes, such winding.[35]If labour cost savings did exist, they were therefore confined to the ring spinning process itself. Meanwhile, first adopters of automatic looms, for example Tootals, experienced problematic labour relations, for example the Daubhill automatic loom strike of 1906.[36] They were also reliant on ring spinning specifically for weft yarn, which was in short supply. Indeed the majority of new ring spinning capacity developed in the early 1900s was for warp and specialised yarns.[37] The superior profits demonstrated in figure 1 arose from greater efficiency in output per spindle and specialisation through market niches.[38]In summary, before 1914, it is clear that ring spinning was more efficient in capital utilisation but did not enjoy a decisive advantage because of labour intensity in pre and post spinning processes and limited competitive advantage in specialised markets.